Speculating on Trophy Art

By Scott Reyburn

March 2, 2014

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''Cracked Egg (Magenta)'' by Jeff Koons.CreditCreditChristie's

LONDON — Works by contemporary artists born after 1945 generated $17.2 billion in worldwide auction sales last year, a 39 percent increase from 2012, according to figures just released by the French database Artprice. Last November, a triptych by Francis Bacon sold for $142.4 million, a record for any work of art at a public sale. And a handy new website, www.sellyoulater.com, now advises speculators on which hot young artists to buy, sell or “liquidate.”

Inevitably there’s talk of a bubble. Art is a notoriously volatile investment that has suffered spectacular collapses, as seen in the great Impressionist boom and bust of 1990-91, and in 2008-9, when contemporary works by Jeff Koons, Damien Hirst and other fashionable names halved in value after the fall of Lehman Brothers.

“Things are different now,” said Allan Schwartzman, the New York-based art adviser. “There’s a momentum in the market that’s dictated by the top players. It’s trophy-driven. There are often six competitors for the major lots at auctions, which indicates to me there isn’t a bubble. Contemporary art has never been supported like this before.”

Others feel uneasy about the record prices being paid by billionaires for big-name trophies, as well as the six-figure sums for paintings by hip 20-somethings like Lucien Smith and Oscar Murillo. But how can a market crash when the people now driving its growth are seemingly rich enough to be impervious to the fluctuations of the wider economy? How do their decisions influence smaller buyers? The art market is rife with speculation at the moment, but does that necessarily mean it’s a bubble about to burst? These are the questions on the minds of many in the art world in early 2014.

“In 2007 we were definitely in a bubble,” said Howard Rachofsky, a Dallas-based collector. “Then after the break it got globalized. The market attracted the attention of international players who are interested in art as another asset and they’ve got huge reserves.”

For instance, last week, at the Art14 contemporary fair in London, Citi Private Bank hosted a gathering of private museums from 16 countries.

The super rich have grown in number and wealth. The world had a record 2,170 billionaires with a combined net worth of $6.5 trillion in 2013, according to the inaugural Wealth-X and UBS Billionaire Census. In the United States, research from the University of California, Berkeley, has shown that the wealthiest 1 percent has captured 95 percent of the country’s economic growth since 2009. Those with tens of millions in disposable cash are looking for alternatives to the stock markets, be it luxury apartments in London or Gerhard Richter abstracts.

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Jean-Michel Basquiat's "Water-worshipper."

CreditSotheby's

“Enormous amounts of money have backstopped at the top of the system among a relatively small group of people,” said Todd Levin, the New York-based art adviser.

Still, art is a relatively small sector of the global economy — total dealer and auction sales were estimated at 43 billion euros, or $59 billion, in 2012, according to the European Fine Art Foundation (the 2013 figure will be announced next week). It therefore takes only a tiny minority of the world’s richest 1 percent to spend a small proportion of its wealth to have a disproportionate effect on such a niche market.

“Right now, they’ve decided that art is a good place to put their money,” said Mr. Levin, who, on behalf of a client, was among at least five bidders competing for Bacon’s “Three Studies of Lucian Freud” at over $100 million. Unprecedented auction prices have paid for trophies by blue-chip artists such as Bacon ($142.4 million), Richter ($37.1 million), Jean-Michel Basquiat ($48.8 million) and Andy Warhol ($105.4 million) within the last 12 months. Some are questioning the sustainability of this bull market.

“The global art market is currently held hostage by the very top end of the market (works sold above $10 million) as well as the taste and wealth of a relatively small number of individuals,” said ArtTactic, an art market research company based in London, in an “Outlook” report published earlier this month subtitled “A 10-year-old bubble about to become even bigger.” ArtTactic said the apex of the market was dominated by about 150 individuals with the resources to pay $20 million for a single work of art.

“These prices are being driven by excess cash,” said Anders Petterson, the founder of ArtTactic. “The wealthy get a lot of social prestige out of buying these works. But if prices rise too much, this clique could lose interest and move on to something else, and if they lose interest, a lot of other people would lose interest as well.”

For the moment, high prices are acting as a stimulus program for wealthy sellers at the expense of auction-house profits. Last week, Sotheby’s announced net annual income of $130 million, or 2.1 percent, on record total sales of $6.3 billion in 2013. (Equivalent profit figures are not available from Christie’s and Phillips, which are privately owned.) Thanks to cutthroat competition for consignments, owners of high-value works like Jeff Koons’s “Cracked Egg (Magenta)” sculpture — sold by Damien Hirst for 12.5 million pounds, or $21 million, plus £1.6 million in buyer’s fees at Christie’s in London on Feb. 13 — are not charged sellers’ commissions and are usually given some of the extra paid by buyers.

The auction houses instead have to make money out of lots in the $50,000 to $5 million range, for which they charge double-digit fees to both the seller and the buyer. This in turn squeezes the profitability of middle-range works that don’t enjoy trophy status.

At Sotheby’s on Feb. 12, for example, the 1984 Basquiat painting “Water-worshipper” sold below estimate for a hammer price of £2.15 million; it had been bought by its seller for €2.4 million at an auction in Paris in 2010.

The bargaining power of today’s richest investor-collectors makes it more difficult for the auction houses, and the bulk of their sellers, to turn a profit, thereby putting further pressure on the skin of what may or may not be a bubble. “It used to be said the air was thin at the top of the market,” said Mr. Schwartzman. “Now it’s thin in the middle.”